Banks Urge U.S. Congress to Extend Crisis-era Deposit Insurance

The expiration of special U.S. deposit insurance at the end of the year has spurred banks to lobby Congress to extend the program out of fear that companies will withdraw billions of dollars.

The expiration of special U.S.
deposit insurance at the end of the year has spurred banks to
lobby Congress to extend the program out of fear that companies
will withdraw billions of dollars.

At issue is the Transaction Account Guarantee (TAG) program,
which insures all bank deposits in checking accounts above the
$250,000 coverage already provided by the Federal Deposit
Insurance Corp.

TAG primarily benefits businesses and local governments that
need quick access to large amounts of cash for payroll and other
needs.

About $1.3 trillion of TAG-insured deposits that do not pay
interest sit at large and small U.S. banks.

The TAG program was created by bank regulators and the U.S.
Treasury during the 2008 financial crisis to attract cash for
banks and reassure depositors that their money was safe. In
2010, Congress extended the TAG program through the end of 2012.

Without another extension, businesses are likely to shift
their deposits to prime money-market accounts and other
short-term alternatives.

"This program is the best deal around," said Robert Haas,
senior treasury associate in charge of cash management and
investments at the National Railroad Passenger Corp., the parent
of Amtrak.

It addresses treasurers' two primary concerns: safety and a
return on cash that comes from discounts banks give on other
services in lieu of interest, he said.

If the program disappears, he will look at other options,
Haas added.

A LIFELINE FOR SMALL BANKS

While the 10 largest U.S. banks hold 70 percent of TAG
deposits, small banks have benefited by attracting deposits from
local borrowers to fund loans that previously went to bigger
banks, which are seen as safer. Community banks with under $10
billion of assets hold about $200 billion of TAG deposits - or
about $23 million per bank.

"Extending TAG is our No. 1 priority this year," said Camden
Fine, president of the Independent Community Bankers of America,
who insists that business lending in distressed communities
depends on the program. "Ending it will have a crippling impact
on any kind of full economic recovery."

The ICBA seeks a five-year extension of the program.

A bipartisan group of legislators have told constituents in
the community banking world that they support the banks, but an
extension is by no means certain.

The U.S. government is trying to exit many of the emergency
financial programs set up during the crisis.

Time is not on the bankers' side on this issue. Only about
three weeks of legislative days are left to craft an extension
of the TAG insurance program before the presidential election.

Banking industry lobbyists said the best possibility is to
attach a TAG extension to a bill that seems certain of passage.
That bill has not yet been determined, they said.

Exacerbating the problem is that banks are feuding among
themselves over the program.

Many large banks are concerned that small banks are winning
deposits by assuring customers their funds are completely safe.
If these banks end up failing, big banks could have to pay more
money into the FDIC insurance fund. Banks are not currently
charged an additional assessment on TAG deposits, but that could
well change.

When directors of the American Bankers Association, a
powerful trade group representing large and small banks,
convened earlier this month, it was a tossup as to whether they
would support a TAG extension, said people familiar with their
thoughts.

By the end of the meeting, they voted almost unanimously to
seek a two-year extension.

"The tipping point was new uncertainty about the economy,"
said James Chessen, the ABA's chief economist.

Bank executives have become spooked about a recent decline
in customer loan demand due to burgeoning concerns about the
euro-zone crisis, the potential year-end budget-and-tax battle
known as "fiscal cliff" and new signs of a slowing U.S. economy.
Extending TAG eliminates at least one element of year-end
uncertainty for them, Chessen said.

WHO NEEDS IT?

Many analysts shrug their shoulders at the controversy.

Big banks don't need the cash. They have fixed the liquidity
problems that plagued them during the financial crisis and
cannot invest or lend their excess deposits at a rate that
benefits shareholders.

"Banks don't want this money because there is nothing they
can do with it," said Richard Bove, an analyst at Rochdale
Securities.

Bank of New York was so awash in deposits last summer that
it threatened to charge companies with more than $50 million in
deposits to offset the fees the bank pays to the FDIC. The bank
retreated from the plan but is now considering charging European
clients who are flooding it with eurodeposits, Chief Financial
Officer Todd Gibbons told Reuters this month.

Noninterest-bearing client deposits at Bank of New York
totaled $63 billion at the end of the second quarter - 46
percent higher than year-ago levels.

The FDIC is "neutral" on an extension, according to a
spokesman.

Last month, acting FDIC Chairman Martin Gruenberg told the
U.S. House subcommittee on financial institutions and consumer
credit that the TAG program has not had a big effect on
depleting the deposit insurance fund. But he declined to
speculate on how ending the program would affect banks or the
economy.

FIGHTING WORDS

Bankers, meanwhile, are anxious about their lobbying
efforts. They worry that credit unions, which have long been
fighting to expand their ability to make business loans, will
piggyback extended powers into TAG legislation.

"The senators we talk to think that marrying TAG, which the
banks really want, with the Member Business Lending bill that we
are lobbying for, would work," said John Magill, executive vice
president of the Credit Union National Association, the chief
trade group for credit unions. "TAG will not end up passing
unless MBL is passed because we have been promised votes in the
House and Senate. The banks don't have a bill or a vehicle to
attach one to."

Representatives of the ABA and the ICBA said they adamantly
oppose a deal that would give credit unions more lending
latitude in exchange for a temporary extension of TAG.

"Credit unions have been wearing out their welcome in
Congress by trying to attach their highly controversial
legislation like a barnacle to any moving legislation," said
Paul Merski, executive vice president for congressional
relations at ICBA, the community banking trade group.

"They again would be the skunk at the garden party here on a
needed TAG extension."